China Strengthens the Yuan against the Dollar

Posted by PITHOCRATES - February 12th, 2012

Week in Review

Well, this should please Donald Trump and Mitt Romney.  And others.  Who are hopping mad about China’s currency manipulation making American exports uncompetitive in China.  The Chinese have strengthened the Yuan on the eve of China’s Vice President Xi Jinping’s U.S. visit (see China’s Yuan Rises to 18-Year High Ahead of Xi’s Visit to U.S. by Kyoungwha Kim posted 2/10/2012 on Bloomberg Businessweek).

The yuan traded at 6.2916 per dollar as of 9:42 a.m. in Shanghai, after touching 6.2884, the strongest level since the country unified the official and market exchange rates at the end of 1993. The People’s Bank of China fixed the reference rate at a record 6.2937 per dollar.

Countries like a cheap currency because it makes their exports cheap.  I mean, inexpensive.  And if your economy is driven by exports you definitely want a cheap currency.  Which is why the Chinese have been keeping the Yuan weak.  To boost their exports.  Which they need more than ever what with her export markets wallowing in recessions.  They need to keep those Chinese exports cheap.  I mean, inexpensive.

China is also seeing some price inflation inside their country.  Caused by that cheap Yuan.  And those low interest rates.  So maybe it’s to help battle inflation on the home front.  Or it’s just to shut the Americans up a little on their currency manipulation talk during their state visit.  Whatever the reason, there is now a Yuan stronger than it has ever been in the past 18 years.  The U.S. economy is saved.  Yeah.

Or is it?  Only about 11% of U.S jobs are in manufacturing.  Most of those in aviation.  With Boeing leading the pack in U.S. exports.  So this stronger Yuan will probably do little.  No, it will take more than that to bring back manufacturing to the U.S.  For the U.S. to manufacture all those things the Chinese are manufacturing either the U.S. has to get cheaper labor.  Or China has to get more expensive labor.  Ditto for all that cheap labor in emerging economies around the world.  (Cheap by our standards but rather well-to-do in those emerging economies).  As none of this is likely to happen the stronger Yuan is not going to bring back much manufacturing to the United States. 

Sorry Donald.  Mitt.  And others.

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The Yuan gaining Value against the Dollar as the Chinese try to Fight High Inflation

Posted by PITHOCRATES - January 1st, 2012

Week in Review

Currency manipulation is a hot topic.  In the era of central banking and fiat money, the laws of supply and demand determine the value of currencies.  If left to market forces.  But governments everywhere like to interfere with these market forces to give themselves an economic advantage.

A nation must sell their goods in their own currency.  Which means when you’re buying their goods you must first exchange your currency for theirs.  The cheaper their currency is the more of it you will get in exchange for your money.  And the more of their stuff you can buy.  This is why countries want weak currencies.  So they can increase their exports.  And boost their economic output.

The Americans (and others) have claimed the Chinese are a major currency manipulator.  Keeping their currency devalued to boost their exports.  But there’s another side to currency devaluation (see Yuan hits record vs dollar, on track for over-4-percent gain by Lu Jianxin and Kazunori Takada posted 12/26/2011 on Reuters).

The yuan has appreciated 4.27 percent so far this year, with most of the gain being recorded in the first 10 months of the year as China tries to rebalance trade and use the currency to help fight high inflation.

While the government has recently halted yuan appreciation amid slowing exports, it also seems to be wary of a weaker yuan that may lead to capital outflows.

This is the trade off of a weak currency and inexpensive exports.  Inflation.  And high domestic prices.  If you manipulate your currency to increase economic activity (by increasing exports) you will create price inflation.  Making the cost of business more expensive throughout your economy.  Which will reduce economic activity.  It’s a double-edged sword.  And the price currency manipulators must pay.   Sooner or later.

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Japan Raising their Consumption Tax may not have Caused their 1997-98 Economic Slump but it sure didn’t Help

Posted by PITHOCRATES - November 20th, 2011

Week in Review

Poor Japan.  Always used as the example of what not to do (see Two things to remember about Japan posted 11/14/2011 on The Economist).

Between 1994 and 2008 American GDP grew 3% a year while Japan’s grew 1.1%… Japan’s working-age population at that time began a long decline, shrinking 0.4% per year over the period while America’s grew 1.2% according to the OECD. That 1.6 point differential can explain most of the difference in growth.

This means that the Japanese population was aging more than the American population.  More people growing older and retiring.  Pulling out of the workforce.  And maintained by the taxes paid by the decreasing number of those still working.  Similar to the projections in the U.S. about Social Security going bankrupt for the same reasons.  Only Japan appears to be further down that road than America.  Which means things will only get worse in America.  If we keep doing what the Japanese are doing.

In April, 1997, the government raised Japan’s consumption tax. That is now routinely cited as a cautionary tale against premature fiscal tightening since it was followed by a steep recession.  But a closer examination suggests the tax increase alone cannot explain the length and depth of the 1997-98 slump… In July, Thailand devalued, touching off the Asian crisis, a major negative for Japanese exports. Then, in November, a series of banks and investment banks collapsed: Sanyo Securities, Hokkaido Takushoku Bank, Yamaichi Securities and Tokuyo City Bank.

This is what happens when you play by Keynesian economics.  First of all you’re in a tax and spend mentality.  And this tax and spend mentality is what destroys economies.

Raising taxes is the worst way to reduce your deficits.  Because your tax policy didn’t cause your deficit.  Your spending did.  If you want real fiscal tightening decrease your SPENDING.  Do that and you’ll see real deficit reduction.

As far as currency manipulation?  Well, if you want to play by Keynesian economics this is what’s going to happen.  For the Keynesian way to work requires the honor system.  To have responsible fiscal policy.  And not to cheat with monetary policy when you don’t.

If you want to prevent currency manipulation then make it harder to manipulate your currency.  Bring back the gold standard.  If you don’t want to do that than just quit bitching about currency manipulators.  Because this isn’t a perfect world.  And cheaters are going to cheat because the game rules make it easy to cheat.

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If it weren’t for High Labor and Regulatory Costs there would be no need for Currency Manipulation

Posted by PITHOCRATES - October 2nd, 2011

Minimum Wage Earners only become Valuable after Costly on the Job Training

Minimum wage jobs are entry level jobs.  And they’re starting to get that in the UK (see Minimum wage harming job opportunities for young by Richard Tyler and James Kirkup posted 10/2/2011 on The Telegraph).

Firms may be reluctant to create jobs by recruiting inexperienced staff because they are put off by the increased wage bill, the Low Pay Commission has suggested.

The Commission’s intervention comes amid calls from businesses for minsters to freeze or even cut the rate to enable more young people to find work…

Official figures last month showed that almost 1 million of the 2.5 million people officially counted as unemployed in Britain are aged between 16 and 24.

Almost 220,000 have been out of work for more than a year and some economists fear a “lost generation” of young people who never learn the habits of work and face a lifelong struggle ever to find employment…

“The concern is that the current rate is discouraging some employees from taking on young people and giving them a chance to get into the workplace,” he said. “Some companies are finding the rate is a real problem.”

The New England Patriots pay Tom Brady more money than the Detroit Lions pay Mathew Stafford.  Stafford was the number one draft pick.  Brady wasn’t.  But Brady has 3 Super Bowl rings.  Stafford doesn’t have one.  Yet.  He may have one soon, though.  He’s having a very good season.  Undefeated through 4 weeks.  But Brady is better.  Because of his 3 Super Bowl rings.  And his experience.  It’s that experience that makes him worth more.

What’s true for quarterbacks in the NFL is true for workers everywhere.  Experience makes a worker worth more to an employer.  Inexperienced workers are worth less.  So they’re paid less.  Just like in the NFL.

The New England Patriots pay Brady a lot of money.  But they can’t pay everyone that amount of money.  Most players will make less than him.  Just like in the workforce.

Key employees are paid more.  And less critical employees are paid less.  Entry level workers with the least skill and the least experience get paid the least.  These are the minimum wage workers.  Who are just starting their working careers.  Most of who are grateful for the work experience.   Because they know if they show ability they can move up.  Gain more experience.  And earn more as they become more valuable to their employer.  Or to their employer’s competitor.

So of course employers oppose high minimum wages.  Because minimum wage earners only become valuable after costly on the job training.  That’s why they’re paid the least.  They come in with nothing.  And don’t provide any value until the employer gives them value through training.  Mentorship.  And experience.

If you Protect your Markets too much from Imports you will Hurt your own Export Markets

Costs are costs.  And labor costs are some of the more expensive costs.  Because there are a lot of other costs attached to wages.  They add up.  And often are a percentage of an employee’s wages.  The higher the wage, the higher these other costs.  Which makes it harder for a business to be competitive.  And in today’s competitive global economy, nations will help their businesses be competitive any way they can.  To try and make up for all those onerous regulations they impose on their businesses (see One more such victory posted 10/1/2011 on The Economist).

A YEAR ago Brazil’s finance minister, Guido Mantega, declared that the world had entered into a “currency war”. He worried that in a depressed global economy, without enough spending to go around, countries would sally forth and grab a bit of extra demand for themselves by weakening their currencies. The dollar, for example, fell by 11% against Brazil’s real in the year to August 2011, much to the chagrin of Brazil’s manufacturers. Like other emerging economies it fought back by imposing taxes and other restrictions on foreign purchases of local securities…

A cheaper real, zloty and rupee will help emerging economies win a bigger share of global spending. But that is small consolation if global spending declines…

Falling export orders was one of the complaints voiced by Chinese manufacturers in a preliminary survey of purchasing managers published by HSBC last week.

Yes, a cheaper currency gives you an advantage.  So a nation wants it.  But so do other nations.  And what’s more, these other nations don’t want your nation to have a cheap currency.  Because a cheap currency means more exports.

But a currency war is a double edged sword.  If you protect your markets too much from imports you will hurt your own export markets.  Yeah, you may succeed in having a cheap currency but little good that will do if your primary export market slaps a punitive tariff on everything you sell there.

And then there’s the danger of releasing the inflation genie from its bottle.  If you devalue your currency too much your own manufacturing costs will rise.  It’ll take more dollars to buy the stuff you need to manufacture the things you sell.  Which means you’ll have to raise prices.  And anyone who buys from you will have to raise their prices.  And so on until this inflation ends in a recession.  Which will slash overall consumer spending.  Making any win in a currency war a hollow one.

The Senate Bill to Punish China for Currency Manipulation is nothing more than Pandering to a Recession-Weary America

So rational thinking bets against any currency war.  Or antagonizing any trade relationships.  Of course, in an election cycle, rational takes a back seat to winning an election (see Senators court 2012 voters with China currency bill by Doug Palmer posted 10/2/2011 on Reuters).

For lawmakers eyeing their re-election prospects next year, this week provides a chance to show they mean business about cracking down on China’s currency practices and returning jobs to America…

“It is very easy to say that China is the bogeyman,” said Doug Guthrie, dean of business at George Washington University. He said the bill would do little to help U.S. jobs and would raise U.S. import costs, but said it might yet pass…

The Senate bill is the wrong approach because most of the goods the United States imports from China are no longer made by U.S. industry, Frisbie [president of the U.S.-China Business Council] said.

“I’ve always been of the view that, if the Chinese currency were to appreciate, we’re not going to get those jobs back in the U.S. They will migrate to Indonesia or Vietnam or Bangladesh perhaps Sub-Saharan African — the lowest next lowest cost place,” Lardy [a senior fellow at the Peterson Institute for International Economics] said.

So this Senate bill is nothing more than pandering to a recession-weary America.  It won’t help the economy.  And probably will end up making things worse.  By making life that much more expensive for the American consumer.  By replacing those cheap Chinese goods with almost as cheap goods from Indonesia, Vietnam, Bangladesh or Sub-Saharan Africa.  All the while creating zero American jobs.   It will just make life more difficult.  But it may elect a politician or two.  And really, now, isn’t that what’s really important?  I’m jesting, of course.

Why Exactly is the ‘Made in USA’ Stamped Stuff more Expensive?

Perhaps it isn’t the Chinese.  Or the other emerging economies.  Perhaps it isn’t the weak currencies of our trading partners.  Maybe it’s us.  I mean, why do we play with the currency in the first place?  To make our goods cheaper.

So the issue we should be addressing is why are our goods more expensive in the first place.  Why exactly is the ‘Made in USA’ stamped stuff more expensive?  Higher labor and regulatory costs.  Such as the minimum wage.  And the hundreds of other costly regulations American businesses have to comply with.  Remove these and America can be competitive again.  With anyone.  Anywhere.  And in any industry.

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Printing Money and Screwing Friends

Posted by PITHOCRATES - November 12th, 2010

My Coworker, the Cheap Canadian Bastard

I worked with a Canadian once.  A real cheap bastard.  Yeah, he had some financial issues.   But they weren’t my issues.  And I got tired of subsidizing his problems by driving him to lunch every day.  And I got tired of the conversations.  He brought up every negative story about America.  Belittled our president.  Chastised America for not signing on to the Kyoto Protocol.  And said that we did not honor our trade agreement concerning softwood lumber (that his government was subsidizing in order to undersell their American competitors).

What really bothered me was that he was a Canadian that lived near the border but worked in the U.S.  He criticized America but he chose to work in America instead of Canada.  Why?  Because he could get paid more in America.  And there were the perks of crossing the border every day.  He gassed his car up in the United States.  And his wife’s car.  Why?  Because our gas prices were cheaper.  Yeah, he would criticize America until he was blue in the face, but he took every opportunity to escape the taxes that paid for all those things that made his country superior to mine.

Now don’t get me wrong.  I like Canada.  I just don’t like hypocrisy.  He made good money over here.  And with a much more favorable exchange rate back then, that translated into big dollars on the other side of the border.  Back when the American dollar was strong and the Canadian dollar was weak, he did very well.  Those strong American dollars exchanged into a whole lot more Canadian dollars.  Which allowed him to buy a whole lot more stuff than his fellow Canadians.  In fact, a lot of Americans vacationed in Canada back then.  Because the American dollar bought more in Canada than it did in America.

Have Cheap Cash, Will Travel – In Canada

So what’s the point talking about this cheap bastard?  Exchange rates.  And whenever there’s a currency war on the horizon, I can’t help but think about this cheap bastard.  See how he, a Canadian working in America, lived very well with a cheap Canadian dollar.  We paid him in strong U.S. dollars.  He then could use those strong U.S. dollars to buy gas and other ‘less taxed’ items on the U.S. side of the border.  (If he brought in and exchanged weak Canadian dollars for strong U.S. dollars, that same amount of gas would cost him more.)  And when he took those strong U.S. dollars across the border back into Canada, he exchanged them and got so many weak Canadian dollars in return that he alone stimulated the local economy.

Of course, he wasn’t the only one bringing strong American dollars into Canada.  When those strong dollars were exchanged for weak ones, the Canadian tourism industry boomed.  People could vacation in Canada for a week for what a weekend in America would cost.  Canadians traveling into America, on the other hand, paid more for less.  A weekend in America would cost what a week in Canada would cost.

In the above example, you can see how the nation with the weaker currency has more economic activity than the nation with the stronger currency.  Now, to understand international trade and foreign exchange rates, make the following substitutions in the above example:

  • Canada -> America
  • America -> China/Germany/Brazil/other U.S. trading partner

Alone Against the World.  And Alan Greenspan

Well, America is devaluing their currency.  They’re printing money to buy back treasury debt.  Supposedly to stimulate the economy by injecting more liquidity. But our problem is not a liquidity problem.  It’s a lack of consumer spending because of high unemployment.  And a fear of being unemployed soon.  So this will do little to solve our problems.  But it will make our exports cheaper.  And our trading partners’ imports more expensive.  In other words, we’re trying to fix our broken economy by flooding our trading partners’ economies with cheap American goods.  Which is pissing them off big time (see Reuters’ Analysis: German tempers fray as U.S. policy gulf widens by Stephen Brown and Andreas Rinke posted 11/10/2010).

Finance Minister Wolfgang Schaeuble, 68, said last week that the U.S. Federal Reserve decision to buy $600 billion of government bonds undermined U.S. credibility and was “clueless.” There was no point, he said, in pumping money into the markets.

China and Brazil were among those echoing his comments but U.S. officials were particularly stung by Schaeuble and German Economy Minister Rainer Bruederle saying the Fed move amounted to “indirect manipulation” of the dollar to boost exports; this at a time when Washington is criticizing China for exactly the same kind of strategy.

“It’s not acceptable for the Americans to criticize China for currency manipulation then slyly help the dollar by printing at the Federal Reserve,” Schaeuble told Der Spiegel magazine.

And speaking of Brazil, President Luiz Inacio Lula da Silva said warned America not to rely on exports alone (see Brazil’s Lula Says World Headed For ‘Bankruptcy’ Unless Rich Nations Act posted 11/11/2010 on the Dow Jones Newswires).

“If they don’t consume, and they just bet on exports, the world will go into bankruptcy,” he told reporters as leaders at the Group of 20 industrial and developing nations headed into a two-day summit in the South Korean capital.

Even Alan Greenspan, former Federal Reserve Chairman, is expressing concern over the impact of American policy on foreign exchange rates (see Greenspan warns over weaker dollar by Alan Beattie in Seoul posted 11/10/2010 in the Financial Times).  In that same article, Mervyn King, governor of the Bank of England, warned that this currency manipulation could trigger a trade war that would make the next 12 months worse than the previous 12 months.

We’re All Cheap Bastards Now

When it comes down to it, I guess we’re all cheap bastards.  We all want some unfair advantage in life.  Like my one-time Canadian coworker.  And I can understand how our trading partners feel.  I’ve worked with and been lectured for years about how my country should change.  All the while he prospered quite handsomely from the way things were.  Of course, I can take some solace in the dollar’s slide.  It’s trading pretty much at parity with the Canadian dollar now.  It’s gotten so bad that I’ve heard my old friend has since found work on his side of the border.  Good for him.  Now he can truly embrace all those taxes that he spoke so highly about while he was avoiding them for all those years.

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